South Africa: On an even keel

The economy is expected to post modest but steady growth in 2012, though to what degree GDP will expand is partly dependent on three key issues: the country’s credit rating, how quickly the government can begin rolling out its high-profile infrastructure programme and how South Africa’s major export markets fare over the next 12 months.

South Africa’s GDP grew by 3.1% in 2011, according to data issued by the South African Reserve Bank (SARB) last month. The economy gained momentum near the end of last year, with GDP growing at an annualised rate of 3.2% in the final quarter of 2011, far better than the 1.7% recorded in the third quarter. The surge can partly be explained by the recovery in the mining and manufacturing sectors and a modest increase in international demand.

Monde Mnyande, a senior economist and advisor to Reserve Bank governor Gill Marcus, said the year-end results showed that prospects for the economy in 2012 were on the rise, with GDP forecast to increase by a solid 2.7% this year.

“The picture of the South African economy that emerges from the analysis is slightly more positive than the snapshot taken three months earlier,” Mnyande said at the release of the SARB report. “While part of this improvement reflects a recovery from activity levels which had been dampened by industrial action and other short-term forces, part of it also seems to indicate a more firmly grounded and sustainable performance.”

The expected GDP growth in 2012, while still respectable, nonetheless falls short of what the country needs to dramatically boost job creation. Employment has been increasing, but at a rate of less than 2%, and given the country’s particularly intransigent unemployment rate, there are concerns that the unemployment rate of 24% may weaken the overall outlook.

“Growth rates are likely to be sub-par, thus should be significantly below the government’s 7% expansion that is required to create 5m new jobs by 2020 in order to reduce the unemployment rate to 14%,” Standard Bank said in a statement issued on March 20. “Given the challenges that face the domestic economy, soft job creation could translate into a higher unemployment rate in 2012, which may have negative repercussions for consumer spending and for the GDP growth picture.”

As a result, there is a lot of attention being given to the government’s spending plans announced in February, in the hopes that they will help stimulate further growth in employment-heavy sectors. The spending plans, which actually rely on a mix of public and private funding, worth some $430bn over the next three years, will feed directly into the economy in labour-intensive sectors including construction, utilities, industry and transport.

To ensure that the benefits of these expenditures is maximised, however, delivery will need to be smooth and coordination between government agencies and the private sector will need to be as efficient as possible. This is an issue that has afflicted state-backed developments in the past, as the minister of finance, Pravin Gordhan, acknowledged in late February, when he told reporters that only 68% of the $23.5bn allocated for infrastructure projects under the 2010-11 budget had been spent.

One possible hurdle to development is the risk that South Africa’s cost of borrowing may rise. At the end of February, Moody’s downgraded the ratings of the country’s five leading banks by one notch, after having previously placed Standard Bank, Absa, FirstRand, Nedbank and Investec Bank on a credit watch last November. Moody’s made it clear that the retrograde step had more to do with the increasingly constrained public finances and the challenges authorities would face if multiple institutions were to need its financial support at the same time.

While the Moody’s downgrade may not reflect badly on the banks themselves, it will likely add to the cost of borrowing, both by the lenders and by the government. This will especially be the case when raising overseas debt at a time when there is increasing uncertainty in the international money markets.

This instability could also hurt South Africa’s export trade, with the economies of many of its key partners again hovering on the brink of recession or having already toppled over the edge. However, if the government is able to keep infrastructure investment flowing in, this could offset some of the expected economic slowdown, meaning that the sure and steady targets for growth in 2012 can still be met.